But doesn’t agree that Nedbank engaged in reckless lending practices.

The National Credit Regulator (NCR) has advised a financially-vulnerable consumer to seek the services of a debt counsellor to “assist her with possible over-indebtedness” but has not found Nedbank guilty of reckless lending practices as contended.

Moneyweb previously reported that retired education specialist, Myrlene Pieterse, approached the Ombudsman for Banking Services on behalf of a financially-vulnerable employee. She argued that Nedbank engaged in reckless lending practices by not adequately explaining the implications of the credit granted.

The employee had received a personal loan of roughly R30 000 from Nedbank as well as two credit cards.

According to the National Credit Act (NCA), a credit agreement would be considered reckless if the credit provider failed to do an affordability assessment, if it became clear that the client did not understand the risks of the credit, or if the debt pushed the client into a situation where she became over-indebted.

The NCR stepped in to investigate the matter after reading about it in the press. As a result, the Ombud for Banking Services was unable to make a finding and closed the case.

The findings

Credit card 1 (October 2015)

In considering data presented by both parties, the NCR found that Nedbank conducted an affordability assessment as required, and that the client’s rights and obligations were explained to her (as seemingly reflected by signed documents and a telephone recording).

The NCR’s own affordability assessment, which took into account the consumer’s net income, minimum living expenses, credit obligations and the new monthly instalment, suggested that she would have roughly R520 left each month.

As a result, it found that the agreement would not have caused the consumer to become over-indebted.

Personal loan (April 2016)

The employee applied for a personal loan to the amount of R30 182 at an interest rate of 35.4%. The loan had to be repaid over four years.

The NCR found that the risks and costs of the credit appeared to have been explained to the client, as reflected by her signature on pre-agreement statements and quotations and that an affordability assessment was done. The NCR’s own evaluation suggests that the employee would have had R1 771 left at the end of the month. The assessment reflects an increase in her net income (the NCR used her average salary between January and March 2016).

Against this background, the NCR found that the agreement would not have resulted in the consumer becoming over-indebted.

Credit card 2 (October 2016)

In terms of the second credit card, the NCR found that the consumer appeared to have been aware of the risks and costs of the credit, as she signed the pre-agreement, quotation and terms and conditions.

Nedbank conducted an affordability assessment and the NCR’s own assessment showed that the consumer had roughly R800 available at the end of the month after her minimum living expenses, credit bureau listings and new credit instalment were subtracted from her net income.

The NCR found that the consumer would not have become over-indebted by entering into the agreement.

In a letter which sets out its findings, the NCR said it took note that Nedbank has since written off this second credit card, but that it may still refer the complaint to a debt counsellor, “if the matter appears to concern possible over-indebtedness of the consumer”.

“The consumer is hereby advised to refer the complaint to a debt counsellor to assist her with possible over-indebtedness.”

Tough balancing act

The case, which was first taken up with Nedbank in April 2017, highlights just how difficult it is to strike a balance between responsible lending and consumer protection through legislative means, particularly as it relates to vulnerable individuals with limited financial knowledge.

The NCA aims to “promote and advance the social and economic welfare of South Africans, promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry, and to protect consumers”, but regulation has its limitations.

Regulators typically have a significant case load and often don’t have the necessary resources or technical skills to do a detailed or financially-scientific credit assessment. As a result, they rely on the information and evidence presented by the parties involved. In such instances – even where the risks were not explained to the client or the client did not understand it – the individual is unlikely to be able to prove as such. A signature would be required to approve the loan and the individual would only become aware of the risks when they are not able to repay the loan at some point in the future – the urgent need for a loan at the point at which the agreement is concluded would heavily outweigh any consideration of the risks involved.

Moreover, affordability assessments only deal with generally foreseen income and expenses. Thus, past income and expenditure is generally regarded as an indication of future income and expenditure. Although this is to be expected (what else could be used?) it has its limitations – debt counsellors will readily admit that in almost all instances where individuals become over-indebted, the situation was triggered by an unforeseen event which required meaningful funds they did not have.

If a financially-vulnerable individual only has a few hundred rand left at the end of each month, it is not difficult to see how easy it is to run into trouble with debt when disaster strikes. But how do you account for such a possibility in an affordability assessment? More important perhaps: Do excess funds necessarily point to affordability?

Stricter rules for credit providers are not the answer. If an exposed individual in desperate need of money can’t get a loan from a regulated institution, one can be sure that they will approach a loan shark or some other unscrupulous lender in the unregulated market.

Financially-vulnerable individuals in particular are at risk of being exploited by lenders, but there are also instances where loans can go a long way in securing a better future – for example by paying for tertiary education.